Thursday, May 28, 2015

What is an IRA?

Getting to the basics of personal finance is an extraordinarily important step in charting a successful financial future for you and your family. While a great majority of workers today are already familiar with the way retirement savings plans work, it can be difficult for some who are new to the game to grab hold of the basic, foundational personal finance topics and put them to work in a meaningful way.

Few Americans today feel that they have enough savings to support them through retirement. In fact, it can be said that almost no one these days feel that they’ll be able to retire fully when they reach retirement age. Even retirees right now are working well into their 70’s in order to supplement retirement accounts that they fear won’t be sufficient to see them through their retirement years. There simply isn’t that much confidence in the social security system and in the economy to remain stable. That’s why it’s important to begin securing your future early. The earlier the better, in fact, since the effective retirement age appears to be rising practically every year.

IRAs are individual retirement accounts. They are set up by you, the investor, and generally carry very good tax advantages depending on the type of retirement account you choose to invest in. In this way, they are similar to 401-k plans, except that they are not typically offered by employers. You can set one up through your local bank or through an online brokerage, and investment is done through an automatic withdrawal from your savings or checking account. You can also opt to invest manually, if you wish to do so, though for most folks, this is really a less efficient way to build retirement savings.

IRA investments run the gamut of potential investing choices, and you’ll have to decide how you want to invest before you get started. Be warned: some accounts and funds will charge you a fee. In the initial stages of your retirement investments, at least, choose a fund and a brokerage that does not charge you a monthly or yearly fee to maintain the account. Those fee-based accounts have their place, but unless you’re dealing with hundreds of thousands or millions of dollars, they can be a waste of money. You’ll have to pay for trades in the account, but these fees can be nominal if you execute them correctly.

Although it’s ultimately up to you what sort of funds you invest in, it’s a good idea to go with proven long-term funds that outperform the stock market over the course of 10-20 years. Be careful there, though, as there are plenty of funds that tanked about 10 years ago, and are only starting to recover now. As much as possible, look carefully at the overall history of the fund and see what way it’s going, considering the up and down turns of the market and how the fund reacted. Relatively stable funds have gone down, but have trended up more often than not. Once you find the right fund, park your cash and leave it alone long enough to make a good return, ideally the year you retire!